In a world with interest on reserves, the central bank has two distinct tools that it can use to raise the short-term policy rate: it can either increase the interest it pays on reserve balances, or it can reduce the quantity of reserves in the system. We argue that by using both of these tools together, and by broadening the scope of reserve requirements, the central bank can simultaneously pursue two objectives: it
can manage the inflation-output tradeoff using a Taylor-type rule, and
it can regulate the externalities created by socially excessive shortterm
debt issuance on the part of financial intermediaries. (JEL E43, E52, E58, G21)
Kashyap, Anil K., and Jeremy C. Stein.
"The Optimal Conduct of Monetary Policy with Interest on Reserves."
American Economic Journal: Macroeconomics,
Interest Rates: Determination, Term Structure, and Effects
Central Banks and Their Policies
Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages